The Iran war has sparked a wave of economic uncertainty, and leading economist Shane Oliver is offering a stark warning about its long-term consequences. Oliver, AMP's chief economist, predicts that the geopolitical ramifications of the conflict will reshape the world order for years to come. The fuel shock caused by the war is just the latest in a series of shortages that have hit the global economy this decade, resulting in higher prices and inflation. Oliver identifies nine key longer-term consequences of the Iran war that he expects will last well beyond the current uncertainties. These include worsening cost-of-living and inflation expectations, increased geopolitical risks, a new generation of terrorists, increased defense spending, a bigger government, and more public debt. He also notes that the improved living standards of the 1990s and 2000s, driven by rapid economic growth, may now be at risk.
Oliver warns that the war may have robbed the Australian government of a chance to address spending and productivity issues during the May budget. He expects the oil shock to accelerate a shift to electrification and electric vehicles to lessen Australia's exposure. However, he also notes that the natural inclination is to hope that the government will step in to ease the burden on households, but warns that reliance on government has limits. He believes that the cost-of-living crisis will continue in coming years, as prices have increased by about 5 to 6% more than wages over the last five years. Oliver argues that the only way to resolve the problem is to find ways to boost productivity, but he doubts that the budget will focus on this issue.
One of the trends Australians have noted in recent years is that once the price of goods goes up during an economic shock, it takes much longer for them to come down. Oliver points to the example of the Ukraine war shock, where oil prices halved but petrol prices did not return to pre-crisis levels. He predicts that prices for commodities like fertilizer and other goods will go up and may not return to their previous lows. Oliver also warns that the push to take more control of oil production in Australia will come with a cost, and may not reduce dependence on Iran in the long term. Overall, Oliver's predictions paint a challenging outlook for Australians, with higher prices, slower economic growth, and increased geopolitical risks.
